9.Sebi in Capital Market Issues

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Accounting and Finance

for Managers LESSON

17

SEBI IN CAPITAL MARKET ISSUES

CONTENTS

17.0 Aims and Objectives

17.1 Introduction

17.2 Objectives of the SEBI

17.3 Entity of SEBI

17.4 Organisational Grid of the SEBI

17.5 Powers and Functions of SEBI

17.6 Role of SEBI

17.6.1 Promoters Contribution

17.6.2 Disclosures

17.6.3 Book Building

17.6.4 Allocation of Shares

17.6.5 Market Intermediaries

17.6.6 Debt Market Segment

17.6.7 Brokers

17.6.8 Suspension of a Broker

17.6.9 Recent Developments

17.7 Critical Review of SEBI

17.8 Let us Sum up

17.9 Lesson-end Activity

17.10 Keywords

17.11 Questions for Discussion

17.12 Suggested Readings

17.0 AIMS AND OBJECTIVESThis lesson is intended to discuss the role of SEBI in regulating the Indian capital market.

After studying this lesson you will be able to:

(i) describe objectives behind instituting SEBI

(ii) know the organisational structure of SEBI

(iii) understand powers and functions of SEBI

(iv) examine the role of SEBI in Indian financial market

17.1 INTRODUCTION

During the late 80, the GOI decided to replace the Controller of Capital Issues Act, by

way of inducting the Securities Exchange Board of India, in order to introduce theregulatory environment in the Indian capital market, to pave way for the promotion ofcongenial and conducive climatic condition for the investing public. Hence the Government


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of India has instituted the supreme authority SEBI to monitor and control the proceedings

of the capital market in the country.

17.2 OBJECTIVES OF THE SEBI

To replace the office of the following major acts of implementation and to attain

the following objectives:

Control of Capital Issues Act (1947)

The Companies Act (1956) - issue, allotment of the securities and disclosures

Securities contract regulation Act (1956) - to control over the stock exchanges

In May, 1992 - the controller of issue of capital, pricing of the issues, fixing premia

and rates of debentures were ceased in operation, provided the SEBI was

promulgated.

Protecting the interest of the investors

Promoting the development of the securities market

Regulating the securities market

17.3 ENTITY OF SEBI

It was registered with the common seal and with the power to acquire, hold and

dispose any property

Power to sue or to be sued in its own name

The Head office is situated in Mumbai; in addition the regional offices were

established in the following metropolitan cities viz Kolkata, Chennai and Delhi, tomonitor and control the capital market operations across the country

17.4 ORGANISATIONAL GRID OF THE SEBI

Six members in the committee

Headed by the chairman

One member each from the ministries of Law and Finance

One member from the officials of Reserve Bank of India

Two nominees from the central government

It contains 4 different departments viz Primary department, Issue management and

intermediaries department, Secondary department and Institutional Investment department

17.5 POERS AND FUNCTIONS OF SEBI

Section 11 of the Act Chapter IV highlights the Powers and Functions of SEBI

Regulating the business of the stock exchanges

Regulating the role of the intermediaries

Registering and regulating of depositories, participants and custodian of securities,

credit rating agencies

Regulating of mutual funds and venture capital funds

Prohibiting the unfair trade practices

Prohibiting of insider trade activities

Regulating substantial takeovers and acquisitions

Frequent conduct of research activities

SEBI in Capital Market Issues

l To conduct any enquiry which warrants the situation to safeguard the interest of

the investors241


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for ManagersCivil Court Procedure 1908:The SEBI has been given additional powers andfunctionswith reference to Civil Court Procedure 1908 to regulate the capital market in

addition to the above enlisted powers and functions

Discovery and production of books of account of the errant during the inspection

and enquiry.

Summoning and enforcing the attendance of the persons to stand before for the

examination of oath.Acc to Sec 12 SEBI is empowered to conduct Inspection of books.

17.! ROLE OF SEBI

Entry norms for the companies at the moment of raising the capital from the

market:

The companies are expected to produce 3 years dividend track record of

preceding the issue.

At the entry level, immediately after listing, important point to be ensured is

that Post issue of networth should be 5 times greater than the Pre issue

networth.

If it is a manufacturing company without any track record, wants to raise any

capital from the market, the appraisal has to be done through development

banks or commercial banks.

Having three years track record, the SEBI never vets offer document of the

issue of capital.

17.!.1 P"#$#%&"'( C#)%"*+,%*#)

Promoter's contribution should not be less than 20% and should be made before

the issue.

If the size of the issues is Rs. 100 cr -50% of the contribution should be made

before the opening of issue and the remaining should be paid before the calls are

made to the investors.

17.!.2 D*(-#(,"&(

Acc.Bhave committee- Financial results i.e., unaudited and audited financial results

should be published.

Risk factors and positions of the company should be highlighted in detail in the

prospectus .

17.!.3 B##/ B,**)75% route was specified at the early moment in the process of book building. Then

the book building process was opened to 100% route to the public.

Sufficient opportunities are to be furnished to the investors to represent through the

terminal to take part in the process of Book building.

The company during the process requires 30 centers atleast for book building process

to raise the share capital from the market.

17.!.4 A#-%*#) # S"&(

The Minimum application was -100 Nos for subscribing the issue of share capital.

Then the Minimum application was hiked to 500 Nos. Then SEBI has felt that the

Minimum application was too high, which did not pave the small investors to within

the available surplus, then the minimum application brought down to 200 Nos.


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Small investors are who hold 1000 shares or few securities

Allotment should be done within 30 days from the date of closure of the issue.

During the non allotment of the shares, the company should refund the amount of

the application money.

17.!.5 M"/&% I)%&"$&*"*&(

The various merchant bank categories were abolished. Each category of issue

intermediary is required to undergo for specific registration process.

Lead managers who manage the issue of capital should have a networth of Rs.5 cr.

17.!.! D&+% M"/&% S&$&)%

Depository system for the debt securities were introduced

Demat facility was specifically introduced for the government securities

Listing of debt securities need not rely upon the equity listing in the respective

stock exchange

FIIs were permitted to invest 100% in the debt instruments of the Indian companies

For the issuance of debt instruments the rating has been mandatory

Minimum two ratings should be obtained for the issue of debt instrument more than

Rs. 500 cr.

Rating agency should not be associated with the firm of issuing company

17.!.7 B"#/&"(

Registration is given - Member of any stock exchange - key factors of

registration - office space, previous experience, man power, selling or buying in securities

Code of conduct-execution of orders, fairness of deals with the investors, issue of

contract note

Financial statements - should be submitted within 6 months of the accounting period

Book of accounts - A minimum of 5 years to be preserved

Regional offices - Establishment only with reference to attend the complaints of

the small investors at speedy rate - Kolkata, Chennai and Delhi

SEBI's final controlling measure is suspension and cancellation of the registration

subject to certain conditions

17.!. S,(6&)(*#) # B"#/&"

Suspension - permanent - dismissal is leading to cancellation of registration - due to

the problem caused

Violation of rules and regulations

Fails to submit the true and fair information according to the norms of disclosures

Untoward conduct with the investor

Guilt of misconduct

Poor financial status of the brokers-deterioration

Stock exchange fees - fail to pay on time to the requirement

SEBI in Capital Market Issues

l Suspension of the membership 243


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for Managers

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Indulges in any act of insider trading of securities

Convicted of a any criminal offence

Sub-Broker

Sub- broker- to obtain the registration

Agreement in between broker & sub-broker

Deposit should be made with - Broker

Transfer of securities - without registration of bearing stamps - considered as bad

deliveries in the angle of stock exchanges -July 1, 1997.

17.!. R&-&)% D&8$&)%(

RBI approval copy is exempted

FIIs are permitted to invest upto 100% in debt market funds

FIIs which have securities worth of Rs 100 cr or more than mandatory requirement

is to settle the transaction only through demat modeFIIs/NRIs/OCB -30% of the equity of the company in accordance with the union

budget - 1997-98

It was hiked by the Union Finance Minister during the budget 2000

C&-/ Y#," P"#"&((

What steps have been taken by SEBI regarding allocation of shares?

17.7 CRITICAL REVIE OF SEBI

Disclosures- To present information only for the interest of investors

Dissemination process - to disclose the information required which leads to undue

delay. The route of dissemination of the information should be through SEBI to

public and by considering the time wastage, the web sites were suggested for

facilitating the investors.

The Settlement for NSE are - Wednesday - Tuesday, and in the case of BSE-

Monday-Friday

Leads to more arbitrage transactions which lead to greater fluctuations in the opening

and closing prices of the securities

Badla trade has been banned due to detrimental to the investors

Special watch system has to be introduced to the international standards

Capital adequacy: The capital required to be maintained is less than for intermediaries

but at the same time the capital adequacy should be to the trading volume of them

only in order to avoid the default risk of the investors.

17. LET US SUM UP

The Govt of India has instituted the supreme authority SEBI to monitor and control the

proceedings of the capital market in the country. The SEBI has been given additional

powers and functions with reference to civil court procedure 1908 to regulate the capitalmarket. Recent Developments RBI approval copy is exempted. FIIs permitted to invest

upto 100% in debt market funds. FIIs which have securities worth of Rs 100 cr or more


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than mandatory requirement is to settle the transaction only through demat mode, FIIs/ SEBI in Capital Market Issues

NRIs/OCB -30% of the equity of the company in accordance with the union budget -

1997-98. It was hiked by the union finance minister during the budget 2000.

17. LESSON9END ACTIVITY

Discuss critically the power and functions of SEBI.

17.10 KEYORDS

Broker:member of the stock exchange, facilitates the client to buy and sell on behalf in

the stock market

Sub-broker:who assists the broker and does the buying and selling transactions for theclient through the broker in the stock exchange

Arbitrage:Buying the security at lesser price at one stock exchange and disposing them

off at higher price at another stock exchange during the same moment

Lead manager:Who takes active role in the process of issue management.

17.11 :UESTIONS FOR DISCUSSION

When SEBI was established ? For what ?

Briefly highlight the objectives of the SEBI.

Explain the role of SEBI in administering the primary market.

Explain the important enactments on the market intermediaries of the stock market.

Elucidate the recent developments with the help of SEBI mandate.

What are the steps taken by SEBI to suspend the registration of a broker?

Why the companies are expected to highlight about the prospects and risk factors

of the issue with relevance to the project?

17.12 SUGGESTED READINGS

M.P. Pandikumar,Accounting & Finance for Managers,Excel Books, New Delhi.

R.L. Gupta and Radhaswamy, AdvancedAccountancy.

V.K. Goyal, FinancialAccounting,Excel Books, New Delhi.

Khan and Jain, ManagementAccounting.S.N. Maheswari, ManagementAccounting.

S. Bhat, FinancialManagement,Excel Books, New Delhi.

Prasanna Chandra, FinancialManagement Theory and Practice,Tata McGraw

Hill, New Delhi (1994).

I.M. Pandey, FinancialManagement,Vikas Publishing, New Delhi.

Nitin Balwani, Accounting& Finance for Managers,Excel Books, New Delhi.

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9.Sebi in Capital Market Issues

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Transcript of 9.Sebi in Capital Market Issues